The dark times of early 2018 may be back upon us.
As I write this, bitcoin has lost over 7% of its value in the last 24 hours alone. The current level around $8,500 represents a 26% drop from the February high of $11,600 and a full 56% drop from all-time highs reached in late 2017.
Like with the previous drops, the culprits seem to be unfortunate news and the ensuing panic selling (as well as stop-loss algorithmic selling). The news, as is always the case, is questionably relevant to bitcoin’s value.
First, Google announced today that it will be restricting advertising for cryptocurrencies and cryptocurrency-related content. Bitcoin’s value dropped 12 percent following a similar announcement by Facebook in late January.
However, the other piece of news likely affecting bitcoin’s price is more general: regulatory uncertainty. As the SEC and Congress draw nearer to drafting and implementing cryptocurrency policies, uncertainty and doubt over the market’s future is building.
Why this is particularly relevant today is thanks to a blog post by European bank Allianz Global. The post declares that bitcoin’s intrinsic value “must be zero” and that a lack of regulation signals that the asset’s value is a traditional bubble close to bursting.
For any crypto investor, the prospect of your valued coins hitting $0 is terrifying to say the least. But the truth is, bitcoin has faced down worse challenges, and I think blue skies are ahead for the rest of 2018. Here’s why:
1. The End Of Big Money Selling
A prevailing theory for bitcoin’s decline in the past several weeks, and indeed over the past couple of months, is selling by Japanese crypto exchange Mt. Gox. The exchange unloaded $400 million in bitcoin on the open market since the end of last year, contributing to lower prices.
Reports now indicate that Mt. Gox will hold off selling until later this year, giving the cryptocurrency market time to recover before selling off its remaining $1.7 billion bitcoin hoard.
In addition, bitcoin futures continue to trade heavily on a number of exchanges. While the settlement prices themselves could be a driving factor in bitcoin’s price swings, another point to consider is hedging. Bitcoin futures traders counting on bitcoin’s dropping in price would likely also purchase the cryptocurrency to hedge their positions, bringing new capital and volume to the market.
Whether these movements will help or hinder bitcoin’s price appreciation remains to be seen, but with the potential for additional financial products, like a bitcoin/crypto ETF, this year could also bring in additional capital and move the needle in its favor.
2. Increasing Adoption Of Cryptocurrencies And Blockchain Technology
While many analysts are skeptical of bitcoin and other cryptocurrencies’ intrinsic values, nearly all of them see the potential of blockchain technology. It has the potential to revolutionize industries from payments and money transfers to contract security and food safety.
A number of cryptocurrencies are working on or have already launched platforms in this vein. Ripple and Stellar, for example, are two companies working to improve the speed and reliability of bank transfers, with the ultimate goal of replacing the SWIFT payment system banks use today.
In addition, thousands businesses have begun to accept cryptocurrencies as payment. Craigslist now offers users the ability to state whether or not they will accept payment in cryptocurrency. Rumors abound that Starbucks and Amazon may begin to accept cryptos in 2018 or 2019. It’s clear that the crypto community wants these changes — businesses just need time to respond.
News of adoption by a major company might be enough to turn the tide for any cryptocurrency. And if there’s one thing we’ve seen with this market, it’s that a rising tide lifts all boats.
3. Regulatory Clarification
Something that may seem counterintuitive is that the current regulatory pressure on cryptocurrencies is not necessarily that traders expect government to ban crypto trading or exchanges. Rather, it’s simply uncertainty surrounding when and if cryptocurrency regulation will be introduced.
Put simply, the biggest enemy of exchange-traded assets is uncertainty. If you don’t think you know how well a company will do next quarter, you may be tempted to sell. That’s why people (and banks) love blue-chip names like IBM and GE; they’re reliable, money-making machines.
Uncertainty is what drives 10% to 20% daily crypto swings. It’s what keeps investors up at night. Regulation could ease that uncertainty by preventing fraud, regularizing trading, and reducing market manipulation. This could allow for stable cryptocurrency values, which would further encourage investment and adoption.
A decision not to regulate, though unlikely, would have the effect of “freeing” the market and could also cause price increases.
Either way, a regulatory announcement is unlikely to be bad for crypto prices. And it’s very likely that regulatory agencies will get on this within the next few months.
4. Selling Fears Behind Us
As we move away from the tumultuous beginning of 2018, relaxing volatility could lead to more gradual, reliable gains. Right now, the fear is that every drop could be the end, and every investor has their finger on the trigger, checking coinmarketcap.com every five minutes.
A period of sustained growth (perhaps caused by one of the reasons above) could alleviate these fears, bringing a period of relative certainty and price appreciation.
Even better, newcomers drawn to the market on new platforms, such as Robinhood, have no such hang-ups about the past few months’ volatility, and might be less likely to panic-sell.
5. Potential Safe-Haven Investment
It’s no secret that the stock market’s nine-year bull run is not long for this world. The next recession is not a question of if, but when.
Where that leaves cryptocurrencies is a matter of speculation. The entire rise of bitcoin has been within the recovery since the 2008-2009 financial crisis. Sure, cryptos have seen their own hard times, but nothing like what the economies of the world faced in those tumultuous days.
Bitcoin was originally created in response to these worries, as a way to transfer money outside the traditional financial system. As the world turns toward recession again, cryptocurrencies could fulfill that purpose and also act as a store of value not tied to traditional currencies or assets.
Some pundits even suggest that cryptos could complement or even supplant gold as a reliable store of value.
Replacing gold is a bit of a stretch, but what we do know is that cryptocurrencies are, for the most part, uncorrelated with the S&P 500 over the past year. In fact, a majority of cryptocurrencies are negatively correlative with the volatility index (VIX), meaning that they rise as stock market uncertainty rises.
While there’s no telling what the future will hold, these indicators at least suggest that cryptocurrencies just might avoid the ravages of the coming recession.
Risks To Consider : Bitcoin and other cryptocurrencies are still unregulated and unpredictable. Research trustworthy exchanges before buying and always invest with money you can afford to lose.
Action To Take : Buy in on a multi-day price reversal and hold for 2018’s continued crypto gains.
Editor’s Note : Not sold on bitcoin? Try our top 10 stocks for 2018 . There are exactly 10 buy-and-hold stocks that can double your market gains in 2018… just as they have for the past three years. Click here for the full report .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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